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The Independent Investor: Budget Deal Craters Social Security Strategies

By Bill Schmick
iBerkshires Columnist

The congressional budget deal that was passed last night will have a dramatic impact on several Social Security strategies. If you have been using, or considering using, the file and suspend clause to increase your Social Security payments, think again.

Back in February of this year, I wrote a column on "How to make the most out of Social Security." I explained that you could improve your total social security benefits, as well as your spouse's, by almost 13 percent by the time you both reach the age of 70. It's called "file and suspend" and occurs when the Social Security claimant files for benefits and then suspends receiving them, while collecting benefits for a spouse.

The ability to file and suspend was granted under the Senior Citizens' Freedom to Work Act of 2000. Although at first the strategy for married couples was an obscure oddity, overtime, especially in the past couple of years, it has become almost main stream with a growing number of financial planners and accountants recommending the strategy to their clients.

The impetus to change these "unintended loopholes" came about in President Obama's budget proposal for fiscal year 2015. The administration argued that these loopholes were simply "aggressive Social Security claiming strategies which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement credits."

Senate Majority Leader Mitch McConnell, a Republican from Kentucky, said closing the loopholes would result in $168 billion in long-term savings.

It is hard to dispute these allegations, although a study by the Center for Retirement Research at Boston College found that only 46 percent of the benefits flowed to the top 40 percent of wealthy households. A couple aged 66 years old that used the file and suspend strategy would potentially be able to make more than $200,000 combined in extra benefits over their lifetime.

With that kind of return, not only the wealthy but anyone who could was jumping on the bandwagon.

There are other changes as well in the legislation. It appears that anyone who turns 62 next year or later would lose the right to collect just spousal benefits, for example. Another provision of the legislation would place a surcharge on higher-income recipients of Medicare.

What has surprised most professionals about the legislation was the speed in which these provisions will be implemented. Normally, changes such as these would give taxpayers plenty of time to adjust. Many who were already claiming these benefits would expected to be grandfathered and only new claimants would be impacted.

Preliminary indications are that in this case the changes would be enacted immediately and no one will be grandfathered but the situation is still fluid. The House passed the legislation 222-167 and now the bill moves to the Senate. Since Nov. 3 is the deadline on the debt ceiling, (when the government's borrowing authority runs out) this budget must be passed no later than next week.

There is still time for some backroom horse-trading in which retirees would be given more time, say six more months or so, before the changes went into effect. Clearly, if you are using one of these claiming strategies, a call to your financial planner or accountant is in order sometime soon to see what the fall out will be once the budget is passed.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

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@theMarket: Regaining the High Ground

By Bill Schmick
iBerkshires Columnist

As of today, the S&P 500 Index is in the plus column for the year. That seemed impossible to most investors just a month ago. And I expect more gains to come over the next two months.

In last week's column, I predicted the worst was over and the price action this week confirms that. This will be the fourth week in a row that U.S. markets have generated positive returns. The engine of growth behind these further gains this week came as no surprise to me.

I have argued repeatedly that the monetary stimulus programs underway by central banks across the globe would keep stock markets climbing. Last week I wrote that "The ECB launched a stimulus program at the beginning of the year. Investors not only expect that to continue, but possibly be increased if economic data warrant it." Evidently, economic data warranted it.

Thursday morning, ECB President Mario Draghi hinted that investors could expect further stimulus in December from the central bank. World markets greeted the news by gaining between 1-3 percent (depending on the country) by the end of the day.

I also mentioned China was another country where "every negative data point will convince investors that the government there will need to stimulate monetary policy further." Their GDP for the year was announced last weekend. It was 6.9 percent, a bit below the government's stated growth target of 7 percent.

Before the U.S. market opened this Friday (and after the close in Asia), China's central bank officials announced another (their sixth) cut in interest rates by one quarter percent. This further fueled gains in both Europe and America. One can only expect that Asian markets will move higher on Sunday night as a result.

In the weeks ahead, I would expect the discussion among Fed Heads to intensify as a result of these new monetary initiatives. Right now, the handicappers are giving a low probability to a rate raise in December.  That could change, if the macro-economic data both here and abroad gather strength. The dollar will also be a renewed topic of concern, since a hike in rates here and a decline in interest rates elsewhere will lead to a stronger dollar.

In the meantime, we still have earnings to worry about. Although the majority of companies have "beat" earnings, revenue and guidance tells a different story. Only 40 percent of companies thus far have raised revenue guidance, blaming the strength in the dollar for these disappointing numbers. Of course, there have been exceptions in the middle of these lackluster results. Some of the biggest names in the technology space have done quite well in both the top line (sales) as well as the bottom line (profits). That has heartened investors somewhat.

As for the markets, we have already topped my short-term targets. My next target on the S&P 500 Index is 2,100. Remember that the year's high is only 34 points above that. By now you should also know that nothing goes straight up, so expect some consolidation. We remain on track to see single digit gains from this index by year's end.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

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The Independent Investor: Water Scarcity Not Only California's Problem

By Bill Schmick
iBerkshires Staff

Just about everyone is aware of the California water crisis. You may be tempted to simply dismiss this on-going event as a local problem, but it isn't. Our world is running out of water and we are on the brink of a freshwater shortage.

At least that is the conclusion of NASA, in a recent report that argues that even giant lakes are disappearing. The agency believes that sometime within the next 35 years the globe will be facing a long and protracted drought of epic proportions.

You might say, "So what? We have plenty of time to come up with solutions. Besides, the 'authorities' will handle it." A look at what is happening in California might dissuade you of that view. Take the Sierra Nevada snowpack, which supplies much of that state's water needs in places like Los Angeles, San Francisco and the Central Valley farms. The snowpack is at a 500-year low. It won't be rebuilt anytime soon.

California is the nation's largest agricultural producer and exporter. It grows more than a third of all our vegetables and two-thirds of our fruits and nuts. The Central Valley, an area roughly 450 miles long and 60 miles wide, is also the U.S.'s top dairy producing region. Thanks to the drought, the water bill for just one 10-acre farm was $33,000 last year versus $3,200 the year before. Farm losses this year could total $2.8 billion.

But it is not only the economic loss that must be calculated. The damage to wildlife is enormous. At least 18 species of fish, including salmon and trout, face extinction. Five million birds or more migrating along the Pacific Flyway are also at risk of starvation and disease.

You may or may not believe global warming is behind this crisis, but leaving aside this debate, both sides cannot dispute that the overuse of groundwater from aquifers is a leading factor worldwide in the coming crisis. Aquifers are underground layers of rocks, sand and silt that store fresh water. These natural wells can be thousands, if not millions, of years old. We have been pumping water out of these wells for eons. Entire cities have sprung up above these natural wells and that has become a problem.

Some aquifers are shallow enough to be refilled through precipitation over time. Unfortunately, for places like California, where the area is experiencing both record lows in rainfall and snow (in addition to record heat) that process is not occurring. And even if it was, the key word in replenishment is time.  Many cities, states and countries are running out of time. Even worse, many more aquifers are deep underground and once depleted are gone forever.

People in Iran, Brazil, and the United Arab Emirates, to name just a few affected areas, are already suffering from this water shortage. Without water, food becomes scarce, employment disappears and political unrest springs to the forefront. Some argue that the conflicts in Syria are more about the lack of water and all the hardship that it creates than it is about politics or religion. Scientists also point to groundwater contamination by pesticides, fertilizers and even hydraulic fracking as another cause of water shortage globally.

As for the "authorities", although California has known of their water shortage problem for decades, it was only this year that Gov. Jerry Brown implemented the state's first water-use restrictions. Restrictions, by the way, are not solutions. Combating this coming worldwide drought will require money, years of effort, and both radical and innovative responses by everyone.

Many solutions are already available. Solar-powered water purifiers, desalination plants, leak monitors, CO2 cleaners, even technologically innovative shower heads are available. What is lacking is the will to implement these solutions now.

Today's politicians are hoping that this year's El Nino will provide enough rain to break California's drought so that the water shortage problem will go away. This out-of-sight, out-of-mind approach to this impending challenge is about what we can expect from our "authorities."

In the meantime, while we wait for this crisis to develop, why don't you begin by doing your part? Go spend the money to at least buy a new water-efficient shower head. Over the course of the next decade, it could save the world thousands, if not hundreds of thousands, of liters of water every year.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

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@theMarket: The Worst Is Over

By Bill Schmick
iBerkshires Columnist

It appears that we have reached our bottom in the stock market. If I'm correct, investors can now look forward to not only recouping any losses incurred over the last three months, but possibly seeing minor gains in their portfolios by year-end. Wouldn't that be nice?

Although I was worried that we might have to re-test the August lows one last time before the middle of October, it does not appear to be the case. Instead, it looks like we are on our way to the old highs. It won't be fast and it won't happen in a straight line. You can expect more pullbacks as we struggle to climb what will be most likely be a wall of worry.

The prospect of slowing global growth, including within the United States, an increasingly uncertain political climate as election rhetoric heats up, the debt ceiling debate, the Fed rate hike risk and continued disappointment in corporate earnings, are just some of the concerns that keep investors up at night. Although I believe these worries are overblown and will prove more of a distraction than a reality, it will keep all of us on our toes.

The most concrete issue between now and the end of the year will be the health of our own economy. Markets have rallied over the past few weeks because a recent string of macroeconomic data points seems to indicate our economy has hit a speed bump. In this case, bad news is good news. As such, the Federal Reserve has postponed a rate hike until the data justifies an increase. That, in turn, was cause for celebration among investors who had feared a rate hike and thus a further slowing of the economy.

As for me, I am sticking to my January forecasts. Monetary stimulus worldwide by the majority of the globe's central bankers will keep stock markets climbing, although as we have seen, not in a straight line; the more stimulus, the more gains. Here at home, I still expect only modest, single digit gains in the S&P 500 Index. This is largely due to our Fed's change in policy from monetary expansion to a more neutral stance on money supply growth. Nonetheless, I still see gains from here.

It was one reason why, although I was expecting this recent sell-off, I made the decision to stay invested. I expected the markets to come back and the timing of getting out and then getting back in was just too uncertain. Consider the last three weeks. Who could have predicted that a weak jobs report two weeks ago would catapult the markets higher by 7 percent - certainly, not me?

China, which I like, is still a topic of concern to investors. This weekend we are expecting a slew of economic data out of that country including a gauge of Gross Domestic Product. Weaker data, however, may not lead to weaker markets, since bad news is good news in that country. Every negative data point will convince investors that the government there will need to stimulate monetary policy further, as it did in this country for several years. The same holds true for Europe. The ECB launched a stimulus program at the beginning of the year. Investors not only expect that to continue, but possibly be increased if economic data warrant it.

Technically, our market appears to be in good shape. We have breached the 2,020 level on the S&P 500 Index. If we can hold on to that level, the next stop should be 2,040-2,050. Earnings have been less than spectacular thus far but, as in every quarter, expectations have been ratcheted down far enough that most companies either are beating or matching earnings estimates. I know I sound like a broken record, but my advice is to stay invested and consider this as a consolidation year.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

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The Independent Investor: The Pumpkin Patch Thrives in America

By Bill Schmick
iBerkshires Columnist

The pumpkin harvest is in and America's farmers assure us that there will be enough supply available for October and maybe even through Thanksgiving. The Christmas holiday season may be a bit more problematic.

Heavy summer rains in parts of the Midwest and elsewhere, as a result of El Niño, have crimped production of this year's pumpkin crop. Illinois, by far the largest producer of pumpkins in the country, has been especially hard hit. Over 80 percent of all commercially grown pumpkins in the U.S. are grown within a 90-mile radius of Peoria. Morton, a small town outside of Peoria, for example, processes 100,000 tons of pumpkin every year. That amounts to enough canned pumpkin to make 50 million pies.

Americans love their pumpkins. Beginning in October, families make their annual trek to their local farm for that perfect pumpkin. Farmers not only bank on that event, but have expanded on that local tradition by offering consumers other harvest experiences such as a trip through their corn maze, petting zoos and haunted farm houses.

Pumpkin-flavored or scented products are also a big business. Starbucks has sold more than 200 million pumpkin-spiced lattes since introducing that drink back in 2003. Candles, pillows, pasta sauce and even pumpkin tortilla chips start showing up in grocery stores about this time.

As Halloween approaches, windows, doorsteps and porches are sprouting jack-o'-lanterns carved from pumpkins. More and more communities are holding carving contests that have elevated this member of the squash family to a work of art. The practice of pumpkin carving is centuries old and originated in Ireland. "Stingy Jack," a mythical Irishman of unsavory character, tricked the devil on several occasions, or so the story goes, with serious consequences. Jack was banished from both heaven and hell and sent roaming the Earth for eternity with only a burning coal to light his way.

Ever resourceful, Jack put the coal into a carved-out turnip. As the myth took hold, believers in England, Ireland and Scotland began making their own versions of Jack's lantern by carving scary faces into turnips, potatoes and even beets. They placed them in windows and doorways to frighten away Stingy Jack and other evil spirits around this time of year. Immigrants from the United Kingdom continued the tradition and found that pumpkins, a native fruit grown in this country for 5,000 years, made perfect jack-o'-lanterns.

The pumpkin business overall is only worth about $150 million a year in the U.S. Economically, pumpkins are a low-cost (but also a low-margin) product that requires a lot of room to grow. Acreage planted in pumpkins could be used instead for higher profit produce. As a result, only a little over 51,000 acres of these orange beauties are harvested each year. Unfortunately, the rain has reduced this year's crop by about one-third.  

The Department of Agriculture believes there will still be plenty of pumpkins to supply our needs through Thanksgiving, but there may be some shortages after that. In which case, just to play it safe, buy a few extra cans of pumpkin pie filling early, so you can be sure to have that dessert on hand for the holidays.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

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Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.

 

 

 



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